Sunday, November 18, 2012

What Does Harley-Davidson share with wine?

What are the key ingredients for success in business? In my mind its defining effective strategy, having a sense for timing in execution, cohesion in a business culture, focused effort, and a bit of luck. But in the end, there is really one thing that separates successful and unsuccessful businesses: Leadership.

There are several successful leadership styles but there is a character trait most successful leaders share. They have the ability to constantly critique their own success and failures and adapt early. They are people who challenge the status quo routinely, constantly seeking improvement rather than living by rules of thumb and falling into routines and ruts.

You are a smart enough person if you run a business or manage a unit within a company. But if you can't back away from day-to-day duties and get a grasp of the environment changing around you and then strategize for the long run, you might be in the wine business for the short run.

I was reminded of that when I saw [an article] this past week about AMF Bowling seeking bankruptcy protection for a second time within the same decade. I honestly hadn't tracked the company of late, but had in the past as a young banker.

I recall sitting at my office in the early 1980's, reading an analyst report on the company that was covered in the WSJ. In it, the analyst reasoned that with the personal computer taking flight, and given all the accompanying enhanced productivity gains we would see, soon we would all flock to leisure activities to fill up our newly discovered copious free time. As a result, we'd see companies like AMF and Voit take off.

I've wondered what happened to that analyst over the years, but his conclusion is a reminder of two things:

You can't trust everything you read in print. Today with the deterioration of mainstream media and increase of internet opinion with no professional standards, its even more important to understand motive in writing a piece as well as the writers credentials in offering opinion. (...you think he had a position in AMF when he wrote that?)

How important it is to take a 360 degree view of the world in the context of your business and predict changes. Without prediction, there is no contingency planning or an ability to size your business bets. The best changes are done thoughtfully, are time-bound, and done with conviction and purpose.

If you [read at all about the company], AMF was filled with smart enough people but they ignored or misread the world change around them then threw a gutter ball in executing strategy. Instead of focusing on their strength, they went on a diversification binge investing in building everything from ICBM missile silos, nuclear reactors, and computers, to Harley-Davidson motorcycles. They held on to their manufacturing instead of outsourcing and in the process ended up with far too many product lines to manage, costly and aging manufacturing plants in the US, and untenable union labor contracts that turned them into a loss generating proposition.

In the meantime, companies like Nike, Reebok and even Coleman threw strikes and built empires with their drilled down approach to their markets and their consumer's behavior. AMF would have done a better job of surviving if they could have read the tea leaves on leisure activities a little better, moved away from a command and control management process, and embraced a culture of constant reflection and change. A great example of that was ironically Harley-Davidson (NYSE: [HOG]), a subsidiary of AMF.

I got a look at Harley as part of their banking team in the middle 1980's. AMF in their early death throes sold Harley back to their management team through a LBO in 1981. At the time the company had major quality and reputation problems in part because of AMF's poor oversight, but also because the Japanese were building not only better, but cheaper bikes. That is a hard combination to beat. The end result was Harley-Davidson was in jeopardy of closing its doors.

After the LBO was concluded, despite a massive amount of debt in a very high interest rate environment, Harley-Davidson was able to double its market share in about six years. They did it by moving away from top-down management and instead of competing on price focused on quality, embracing Japanese manufacturing philosophies such as [Quality Circles].

They then established a user group of hard-core Harley lovers to gain their perspectives and feedback in manufacturing and design. Probably as much from financial need as a philosophical change, they adopted [Just in Time] manufacturing which led to stock outs on parts and delays in manufacturing. The consequence was lengthened delivery time for the bikes. But instead of becoming just one more nail in a coffin, the company improved communication with their suppliers and most important, their consumer base who adopted the delay as part of the improved focus on quality and craftsmanship.

There are similarities between what Harley dealt with and what the US Wine Business may be facing. As mentioned in prior blogs, I expect the US dollar to continue to strengthen over the Euro and other wine producing countries such as South Africa and Argentina. That will favor foreign imports, just like Harley found.

We can't control changes in economies so how do we in the wine business apply this? First, we have to be better at reading market changes. That is in large part what we discuss in the SVB Annual State of the Wine Industry Report which is in process as we speak.

Second, take an unbiased look at the horizon. That is what I attempt to offer readers through SVB on Wine, and offer our clients with direct management presentations. But management teams have to want to have the discussions and ask hard questions about their own operations first. It is an issue of culture that at times can rebound off a leader's ego. But there are ground-shaking changes going on under foot today, and business leaders and teams need to understand both how the change might impact your business and what new opportunities are available.

Last is learn from others. Like Harley, engage your clients. Understand them better. Work on improving your company's CRM and data management. Then ask more curiosity questions of those who have gone before you. Your wine-making neighbors are more than accommodating in talking about the things they've learned the hard way.

Don't stop there. Extend that to other industries. Take Harley as an example. That was a business that learned how to compete on quality, employ learning from other companies, and change their management focus to gain buy-in from employees. Its so easy to be a top-down manager. I've certainly made that mistake at times. But success is a team sport in business and that requires getting others around you to take ownership and see the rewards from stepping up and solving problems. Harley like the wine business became a luxury good instead of a commodity. How did they do that? Executing all the changes noted above and segmenting their customer base to recognize the core opportunity. You can find many other business philosophies that can be applied if you move out of your normal reading and conference going patterns.

Please offer your own thoughts and insights about changes in management approaches, share your experienced view on business changes that might came up in your own memory as a result of reading this, and as always - feel free to disagree and offer your own perspectives. After all, you can't trust everything you read.

12 comments:

Lots to take in here, big picture stuff. One angle that occurs to me is that while Harley may have improved quality, I doubt that was/is reason #1 why people moved to Harley. There was something far more emotional going on--something about patriotism in the core demographic and the lifestyle that one projected whilst riding one. Quality was there as a lack of an obstacle.

That may be one way to bring tactics to the discussion -- realize that purchase decisions are always emotional decisions and there are 50 things about a wine that sell it other than the experience of the liquid inside. Think about the brand, packaging, and all that goes into what you're projecting with it.

Thanks for the thoughts Nick -Prior to the LBO, Harley made bikes that were more expensive than those sold from Japan as a consequence of a very strong dollar. The bikes really suffered from a quality problem. Made in America was losing its luster, but being the last American made bike was an advantage. That said, think about what it would be like to have a lesser quality product selling for more against imports. That's a hard equation to bust. In the US Wine Business, that is pretty much what we faced in the early 80's with the fine wine side of the business just starting to figure out what to plant and how to make great wine. Fortunately we did improve quality and that made us competitive even with higher bottle prices.

Today, I don't think we can expect the same degree of quality enhancement we witnessed in the 80's & 90's so that's a lever we can't pull if we needed to compete. But to your tacticle point, we can do a better job supporting the industry pricing standard with enhanced marketing of US Wine as a brand.

There was also a demographic tailwind for H-D for the last three decades--Boomers. (My comment is not meant to take anything away from your insights, BTW.) It will be to watch their evolving strategies with X, Y and millenials.

Excellent point PinotGraves. There was indeed a tailwind and the marketing done by HD really helped cement the notion of freedom and rebellion. It's really the exact same tailwind the wine business has benefited from and in the same way, its going to be interesting to see how we transition as a business to the next generations too.

As a FORMER Harley (buell) owner I will never own one again! From horrible customer service, to folding brands, to not sticking behind products, to even more horrible mechanics, and even worse customer service at the corporate level, I will never own one. This is still NOT a company of quality and their products are still suspect. They should be selling t-shirts, bumper stickers, and continue to invest in Craftsman tools b/c everyone who buys a HD will be investing in tools. Oh, and AAA while you're at it b/c yes, one day, sooner than later you'll need that membership to come get your inoperable HD off the side of the road. There is no business comparing HD to any wine brand, at all, ever.

Truly appreciate the post and personal current experience with the product, but it misses the point of the post. If we were recommending the bike for consumers, this would be on-topic but that's not the point. This is a case study of things their management did in the 1980's. I am very interested in possibly applying the things they did to turn the business around. They should have gone broke in the 1980’s, but instead today show $5.6BN in sales, a $10.8BN market cap, and at the moment are a buy recommendation from most analysts.

What is comparatively relevant for the wine business is the analysis they did, the strategy they chose, and the tactics they employed to achieve success when confronted by a seemingly unsurmountable pricing odds. They were getting killed by cheap imports.

In the same way, the US wine business is at risk of experiencing a negative pricing trend from the wine producing countries in Argentina, the Eurozone countries of France, Italy, Spain, and Portugal, as well as South Africa each of whom is showing a weakening trend against the US$ which gives them pricing advantages on our own shores.

What will the US Wine Business do if the growing trend of cheaper and quality-comparable imports continue to gain market traction in the US? The things that Harley did are instructional from that perspective.

Companies and people constantly make the lowest price, lowest cost producer mistake. First, people that make buying decisions solely based on price are not loyal customers. They will jump ship for a penny price difference. Second, there will always be someone that is willing and/or capable of beating your price. If lowest price is your only competitive advantage and competition takes that away, you have no where else to go.

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